Online Payday and Installment Lenders Face Ominous Risks
Online payday and installment loan lenders face ominous risks. Heavy regulation, prosecution and too many delinquent accounts are just a few of the perils confronting the industry.
Payday Loan Industry Faces Onerous Regulation Burdens
According to CNN, about 12 million Americans take out short-term loans each year. The success of the business and its reputation as lenders that entice people into “debt traps” has caught the attention of federal regulators. In fact, a number of different agencies are investigating the industry. The Justice’s Civil Division, the Office of the Comptroller of the Currency and the Treasury’s Financial Crimes Enforcement Network are a few that are involved while the Consumer Federal Protection Bureau, or CFPB, is the agency that will regulate the industry.
The CFPB may require the industry to limit the number of loans that it issues to people to ensure that borrowers can pay the loans back without going into default or extending their repayment time. Consumers may also have to wait 60 days before requesting another loan. Additional regulations would prevent payday loan lenders from automatically withdrawing funds from a customer’s checking account without the proper notification. In addition, lenders would be blocked from attempting multiple withdrawals.
Some government officials consider the action of accessing consumer checking accounts a con. Michael Bresnick, a former federal prosecutor, said, “If we can stop the scammers from accessing consumers’ bank accounts, then we can protect the consumers and starve the scammers.”
When the CFPB announced its regulation proposals against payday lenders last year, the industry’s stocks fell. The agency will be announcing its official rules for short-term lenders soon. When it does, loan companies may once again face the risk of plummeting stocks.
A number of payday loan lenders are facing prosecution. The CFPB and the Justice Department issued civil subpoenas to numerous financial companies. According to The Center for Public Integrity, the government is attacking the short-term loan industry by using anti-money laundering laws and state regulations.
New York has been especially aggressive in its attacks against payday loan lenders. State officials ordered lenders to stop issuing loans that feature interest rates that are higher than 16 percent since this is the state’s interest rate cap. New York also sent letters to banks in an attempt to block short-term loan lenders from the global network that financial institutions use to process transactions. Payday loan lenders are facing similar risks from California, Minnesota and Virginia.
Peter Barden, the spokesperson for the Online Lenders Alliance, spoke out in defense of the short-term lending industry. He said, “Rather than restricting consumer choice, state officials should be focused on finding a federal solution.”
Payday and installment loan lenders also face nonpayment risks. The Hill reports that the Center for Responsible Lenders completed a study involving delinquencies in North Dakota. According to the study, approximately 46 percent of short-term loan borrowers defaulted on their loan within the first two years of receiving the funds. In addition, a significant number of borrowers failed to repay the first or second payday loan that they borrowed. If this is happening in North Dakota, it is likely occurring in other states. Because payday loan companies borrow funds to those with poor or no credit histories, they are doing business with a risky demographic.
Going Out of Business
The short-term loan industry has been dealing with prosecution and delinquent accounts for some time. Both situations put lenders at risk of going out of business. In addition, if the CFPB puts through strict regulations against online payday and installment loan lenders, it could force as many as 70 percent of them to go under. Millions of people would lose access to credit. Charles River Associates assessed the agency’s list of proposed regulations. It found that short-term lenders would lose an estimated 82 percent of their revenue. Any company would be hard-pressed to stay in business with that kind of profit drop.
Has the CFPB given the online loan industry adequate input and representation regarding its business practices? Senator David Vitter said, “The CFPB is legally required to assess the impact of its rules on small business, and yet, there have been disturbing recent charges that the agency is failing to do so.” A number of political leaders say that the online payday loan industry has operators who run their business unethically, and because of this, federal oversight is required. If the added supervision is too restrictive, then the industry is at risk of going out of business.
A Risky Time for Lenders
With the CFPD breathing down the necks of the short-term lending industry and legal action taking place, online payday and installment loan lenders face ominous risks. Many companies are also dealing with the possibility of going under. To read more about the risks that online and installment loan lenders face, visit the PersonalMoneyStore.com.